Definition of Tobin tax

The “Tobin tax” was originally proposed in the early 1970s by James Tobin, an influential American macroeconomist and recipient of the Nobel prize for economics.

His idea was prompted by the collapse of the Bretton Woods system in 1971, which replaced an arrangement of fixed exchange rates ultimately based on the US dollar’s peg to gold with a period of volatile floating exchange rates.

He wanted to discourage short-term currency speculation, which makes it difficult for countries to implement independent monetary policies by moving money quickly back and forth between countries with different interest rates. [1]

As described by Tobin, the tax involves applying a small charge – of as little or less than 0.1 per cent – on foreign currency transactions to protect countries from exchange-rate volatility caused by short-term currency speculation.

Before Tobin died in 2002, he changed his thinking, arguing that the tax was unworkable because the liberalisation of the capital markets made it much trickier to undertake. [2]